Master of Business Administration (MBA)

Semester : III 10 Nov 2014

Sessional Examination
ELECTIVE :I
Paper : I Subject : Advance Financial Management

Time: 3 Hrs. Max. Marks: 70

Note:- 1) Question No. 1 is compulsory.

2) Attempt any FIVE questions from Question No.02 to Question No.10

Question No.1. N. B. Attempt any Ten questions from Question No. One.
Write Short Answer in thirty words approximately. All questions carry 2
marks.

A) What is Red Herring prospectus?

B) What are the advantages of ASBA?

C) Write a short note on Project Feasibility

D) Features of Financial Lease.

E) Write a short note on External Commercial Borrowings (ECB)

F) What is Reverse book building?

G) Explain the term point of indifference.

H) What is venture capital?

I) Write the advantages of leasing to the lessee.

J) What is Sensitivity analysis?

K) What is capital structure of a company?

L) Write short note on ASBA

M) Write a note on acquisitions.

N) What do you meant by synergy benefits?

O) Write short note on ASBA
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Question No.2-10

N. B. Write answers in Three Hundred words approximately. All

questions carry 10 marks.

Q.No. 2 The overall cost of capital of unlevered firm, V Ltd., will be 15 % i.e.,
the equity capitalization rate. The following is the data regarding two
companies X and Y belonging to the same risk class:

Company X Company Y

Number of ordinary shares 90,000 1,50,000

Market price per share (Rs.) 1.20 1.00

6% Debentures (Rs.) Profit 60,000 ----

before interest (Rs.) 18,000 18,000

All profits after debenture interest are distributed as dividends. Explain how
under Modigliani & Miller approach, an investor holding 10% of shares in
Company X will be better off in switching his holding to Company Y.

Q.No. 3 PQR Ltd. is considering relaxing its credit policy and evaluating two
proposed policies. Currently, the firm has annual credit sales of Rs. 50 lacs and
Accounts receivables of Rs. 12,50,000. The current level of loss due to bad debts
is Rs. 1,50,000. The firm is to give a return of 20% on investment in the new
(additional) accounts receivables. The company's variable costs are 70% of the
selling price. The following further information is furnished:

Particulars Present Policy Policy option I Policy option II

Annual credit sales Rs.50,00,000 Rs.60,00,000 Rs.67,50,000

Accounts receivables 12,50,000 20,00,000 28,12,500

Bad debt Losses 1,50,000 3,00,000 4,50,000

You are the management accountant of the firm. Advise the MD which
option should be adopted?

Q.No. 4 ABC Company has decided to acquire a Rs. 5,00,000 pulp control device
that has a useful life a ten years. A subsidy of Rs. 50,000 is available at the time
the device is acquired and placed into service. The device would be depreciated on
straight-line basis and no salvage is expected. The company is in the 50% tax
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bracket. If the acquisition is financed with a lease, lease payments of Rs. 55,000
would be required at the beginning of each year. The company can also borrow at
10% and debt payments would be due at the very beginning of each of the ten
years. What is the present value of cash outflow for each of these financing
alternatives, using the after-tax cost of debt ? Which alternatives is preferable ?

Q. No. 5 Naveen Enterprise is evaluating Project for introducing a new

Product. Depending upon the response of the market - the factor which is the
largest source of uncertainty for the success of the Project the management
of the firm has identified three scenarios:

1) Product will have a moderate appeal to customers across the board at a

modest Price
2) The Product will strongly appeal to large segment of the market which is
highly price- sensitive

3) The Product will appeal to a small segment of the market which will be
willing to pay high Price.

Particular Scenario 1 Scenarios 2 Scenarios 3

Initial Investment 300 300 300

Unit Selling Price 30 20 50

Demand 20 40 10

Variable Cost 12

Fixed Cost 50

Tax Rate 50%

Project Life 10 Years

Cost of Capital 15%

Calculate the NPV in three Different scenarios.

Q.No. 6 ABC Company is taking over XYZ Company. The shareholders of XYZ
would receive 0.8 shares of ABC Co. for each shares held by them. The merger
is not expected to yield in economics of scale and operating synergy. The
relevant data for the two companies are as follows :

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 Particulars ABC Co. XYZ Com.

Net sales (Rs. crore) 335 118

Profit after tax (Rs. crore) 58 12

Number of shares (crore) 12 3

Earnings per share (Rs.) 4.83 4.00

Market value per share 30 20

Price earning ratio 6.21 5.00

For the combined company (after merger), you are required to calculate
(a) EPS, (b) PE Ratio, (c) market value per share, (d) number of share, and (e)
total market capitalization. Also calculate the premium paid by ABC Co. to the
shareholders of XYZ Co.

Q.No. 7 Describe the trade-off theory of capital structure.

Q.No. 8 What is cash management? What are the objectives of cash

management?

Q. No. 9 What is venture capital financing? Describe briefly the main features
of venture capital financing.

Q.No.10 What do you understand by book building? Discuss its advantages

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